If you're confused and perplexed about the market we're in right
now, this should bring some clarity to the situation.

In the third quarter of 2014, Dylan Grice, a portfolio manager at
equity fund Aeris Capital, wrote a note that perfectly describes
the market we're in right now.

Of course, back then stocks were riding high. The S&P 500 had
closed the year up 11%, M&A deals and initial public
offerings (IPOs) were being executed left and right, and the
Federal Reserve had just finished QE3, the bond-buying program it
began at the start of the financial crisis.

The world, we thought, was on the road to recovery.

But Grice did not think that. He believed that we were at the end
of a cycle, though not one economists normally discuss. The cycle
Grice was writing about was a "cycle of trust."

He wrote:

In my opinion, the period between the Berlin Wall coming down and
the September 11th, 2001 attacks on the United States was the
peak of the recent cycle. The degree of cooperation and trust was
probably as high as it had been since a century earlier, as the
19th century became the 20th century.

But cycles move, and it's important to notice the signs that
they've peaked. Looking around in 2014, Grice saw them
everywhere.

He continued:

What we do think we know is that the financial markets are
playing with a very cooperative mind-set while the key players
and factions in the outside world are not. Non-cooperators are in
the ascendancy and the investment climate will ultimately reflect
this.

Trust and cooperation, you see, is what the entire global economy
is built on.

How he saw it then

To execute an IPO, lend money, or buy stocks, you have to believe
that the person you're executing a transaction with is acting in
good faith.

As Grice pointed out when he wrote the note, in 2014 good faith
and trust were all around. Remember, 43% of the bonds issued
in 2014 had junk ratings of CCC, but people bought them
anyway. Those buyers were trusting in the economic recovery, an
easy monetary policy, and the creditworthiness of the issuers.

Outside the markets, however, Grice saw trust receding. Russia
was moving aggressively away from the West, and the West
responded with crippling sanctions. Far-right groups were getting
louder in Europe, and the Japanese and Chinese were trading barbs
about the South China Sea.

Trust seemed to be evaporating on a national level, too.
Governments were still hitting banks hard with fines for offenses
dating back to the financial crisis. Quantitative easing, or
"money printing" as Grice calls it, was ending at the same time
it was losing credibility as a policy.

The massive Petrobras scandal was unfolding in Brazil — a scandal
that would shake the country's faith in the government that had
guided the seventh-largest economy in the world to prosperity for
decades. Party candidate Dilma Rousseff would go on to win the
presidency by just a hair.

The S&P 500 over two
years.Yahoo
Finance

Grice reasoned that these were signs that trust was evaporating.
He argued that that trust — between governments,
corporations, banks, and even people — would be sorely missed, as
it is necessary to grease the wheels of the global economy.

"We... see it in the economic data," he wrote. "The Latin
word for 'credit' is 'credere,' which means to
trust... And I think the cycle of trust has turned.

"I don't think Russia and the West will go back to being friends
any time soon; that China and Japan will dial bank their
resurfacing mutual animosity; that the Middle East is about to
solve its problems... I think it's only just the beginning,
because I think that's how these cycles work."

How we're seeing it now

In January, the Bank for International Settlements (BIS) released
a report showing that lending from banks to entities across
borders was drying up. Lending to emerging-market economies
slowed the most. Out of those, China was hit the hardest, as
lending to the country from foreign banks fell 17% in 2015 from
the same time a year before.

Cross-border
claims to select emerging-market economies, from the
BIS.Bank of International
Settlement

Odd, since it's hardly the worst off of all the emerging markets.
Its economy certainly isn't in as much danger as, say, Brazil or
Nigeria. Yet banks were losing faith.

Meanwhile, international bank lending to China peaked around the
time Grice wrote his note in 2014, according to BIS data.

It isn't as if China's GDP data changed much in 2015. It's
not as if the Chinese banking system suddenly became drastically
more indebted, either.